Optimal Monetary Policy with Overlapping Generations of Policymakers

February 1, 2010

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.

Subject: Inflation, Output gap, Prices, Production, Technology

Keywords: Commitment, cost-push shock, Discretion, efficient frontier, Inflation, inflation-output gap trade-off, loss function, member tenure, members result, monetary policy, Monetary Policy Committee, MPC member, objective function, Optimal Monetary Policy, Output gap, output gap volatility, standard deviation, WP

Pages:
36
Volume:
2010
DOI:
https://doi.org/10.5089/9781451962642.001
Issue:
032
Series:
Working Paper No. 2010/032
Stock No:
WPIEA2010032
ISBN:
9781451962642
ISSN:
1018-5941

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